Norwegian Krone: Valuation headwinds temper NOK against Euro – BNY
BNY’s Geoff Yu notes that stronger Oil prices have improved Norway’s terms of trade, but EUR/NOK gains have pushed up the I-44 import price index.
BNY's Geoff Yu highlights that Norway's NOK has faced valuation challenges, with EUR/NOK gains impacting the I-44 import price index. While Norges Bank focuses on domestic factors due to NOK's positive performance year-to-date, Yu notes that the valuation case is weaker compared to peers like PLN and SEK. The surge in oil prices this year has improved Norway's terms of trade, but gains are not as significant as in 2022, and there's limited tailwind from central bank sales.
EUR/NOK has also strengthened in Q2, pushing up the import price index. Signs suggest Norwegian import prices may follow Sweden's trajectory, diverging more from EUR/NOK and increasing pass-through risk. Despite these risks, NOK's year-to-date strength provides a buffer against inflation, enabling Norges Bank to remain focused on domestic factors.
The energy-dominant supply shocks differentiate NOK's reaction to external factors from peers. With high NOK holdings relative to G10 peers, the valuation case remains weak. Unlike PLN and SEK, NOK is more responsive to domestic triggers, particularly wages, and Norges Bank will likely act proactively to any risks.
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